Article 1    These Practice Directions are formulated in accordance with Article 25 of the Audit Law of the People's Republic of China for the purpose of standardizing audit of projects with foreign loans and assistance and ensuring the quality of such audit.

Article 2     The term "projects with foreign loans and assistance" mentioned herein refers to projects sponsored by international organizations, international banking institutions as well as foreign governments and their related organizations (hereinafter referred to as "providers of foreign funds") such as loan, assistance and grant projects to China's government departments and their subordinate organizations, loan projects to China's banking institutions and enterprises/undertakings which are guaranteed by China's government departments or their subordinate departments, assistance and grant projects to communities which are entrusted by the above-mentioned government departments to manage relevant foundations and funds as well as other projects with the application of foreign loans and assistance.

Article 3     The term "audit of projects with foreign loans and assistance" mentioned herein refers to auditing supervision conducted by audit institutions according to the law over the truthfulness, compliance and value for money of the projects and revenues and expenditures of organizations in charge of project implementation during the construction period after the enforcement of project agreements and the utilization period after inspection and acceptance tests at the completion of the projects.

Article 4    Audit of projects with foreign loans and assistance is conducted for the purpose of confirming the truthfulness of financial reports and relevant accounting documents of such projects, maintaining the solemnity of state laws, regulations and systems on foreign funds application, promoting active, rational and effective utilization by project implementation organizations and competent government departments, increasing the ability of foreign debt repayment as well as facilitating implementation of state policies on foreign fund utilization and industry guidelines and plans for the development of the society and national economy.

Article 5    Audit institutions shall include projects with foreign loans and assistance in their annual audit plans as requisite items of audit.

Article 6    The CNAO shall determine division of audit duties and carry out relevant audit authorization in accordance with the creditor-debtor relationship of projects with foreign loans and assistance and the administrative relationship between various beneficiaries and on the basis of the Interim Provisions of Audit Institutions on Determination of Audit Jurisdiction.

The CNAO shall conduct audit of projects where central organizations of public finance and departments of the State Council and their direct subordinate enterprises and undertakings are the direct beneficiaries, bear the debts or provide guarantees for the debts.  For projects with foreign loans and assistance transferred or allocated by the Ministry of Finance, the Central Bank or other competent central government departments, the CNAO shall in general authorize relevant local audit institutions to carry out the audit.

Article 7    Audit institutions shall conduct audit on the basis of  agreements concluded between the Chinese and foreign parties on projects with foreign loans and assistance and according to international audit standards, audit procedures and the principle that audit supervision should be carried out in combination with audit certification.    

Article 8     Basis for conducting audit of projects with foreign loans and assistance shall include relevant state financial and economic laws, regulations and systems; state policies on foreign fund application, industry guidelines, plans for the development of the society and national economy, project agreements concluded between the Chinese government ( including its relevant departments) and international organizations, international banking institutions, foreign governments and their relevant organizations; internationally accepted audit and accounting standards.

Article 9    When auditing methods used in the preparation of financial reports and management of accounting documents related to projects with foreign loans and assistance, audit institutions shall examine the following major items:
(1) Compliance of the basis, formulae, content, procedure and timing for the preparation of project-specific financial reports or summary financial reports with relevant accounting systems, project agreements and international accounting standards as well as the consistency of such compliance.  Where material deviations are found, efforts shall be made to detect the underlying reasons and require the audited bodies to make appropriate explanations in the financial statements in accordance with requirements of the international accounting standards;
(2) Degree of compatibility between related accounts in project-specific financial reports;
(3) Consistency between accounting statements and notes to the statements with related books, vouchers and other testimonial documents and physical assets;
(4) Compliance of the management of financial reports, books of account, vouchers and accounting archives.

Article 10     When auditing the sources of financing for projects with foreign loans and assistance, audit institutions shall examine the following major items:
(1) Compliance with project agreements in such aspects as progress, category and proportion in withdrawing foreign funds, completeness and truthfulness of testimonial materials for fund withdrawal, completeness of the procedures of examination and approval, timeliness and accuracy of accounting treatments.  Whether allocation and payment of withdrawn foreign funds to project units at lower levels are made in time and full and according to project agreements or agreements on lending foreign funds.  investigations shall be made for imposing sanctions and penalties against acts in violation of laws and regulations such as encroachment on as well as  appropriation, transfer and embezzlement of foreign funds;
(2) Compliance with project agreements in the scope, purpose, quota, procedure, date of payment, procedures of review and approval of      expenditures where foreign funds are withdrawn through the means of establishing expense accounts, retracing reimbursement or payment after closure of foreign fund accounts.  Investigations shall be carried out for imposing sanctions and penalties against acts of fraud such as unauthorized alteration and forgery of testimonial documents for fund withdrawal;
(3) Whether collection, allocation, payment and verification of domestic supplementary funds and financing of other projects are made according to project agreements in time and full;
(4) Whether project units bearing foreign debts have financed reserves for repayment of loans, established, utilized and managed accounts for such reserves and included in the management of such reserves various discrepancies of transferred loan interests, incomes from deposit interests, loan principals of foreign debts claimed back ahead of the time schedule and revenues from experimental production.  Investigations shall be carried out for imposing sanctions and penalties against acts in violation of laws and regulations such as transfer of funds and establishment of "unauthorized treasuries".

Article 11    When auditing fund utilization of projects with foreign loans and assistance, audit institutions shall examine the following major items:
(1) Truthfulness and compliance of construction costs.  Whether expenses on construction, purchase of equipment, training and study tours, expert consultation and project management are incurred for the purposes and within the scopes stipulated by project agreements;  whether testimonial documents are complete and conformable to relevant regulations;  whether accounting treatments comply with relevant accounting systems.  Priorities of audit shall include the following:  compliance and truthfulness of procedures for conclusion of contracts and settlement of accounts, i.e., whether projects are sub-contracted illegally or quotas for settlement are increased randomly;  truthfulness and compliance of labor costs, material expenses, indirect costs and apportionable investment,  i.e., whether scopes of expenditure are expanded, standards of expenditure are raised or expenditures are disclosed falsely; compliance of the procedure of transferring completed projects for actual usage; compliance of the tendering procedures for equipment and other physical articles as well as their purchase, inspection and acceptance tests and accounting treatments.  Investigations shall be carried out for imposing sanctions and penalties against acts in violation of laws and regulations such as alteration of the purposes of foreign fund application without due authorization, bribing and acceptance of bribes in the course of tendering and purchases and other fraudulent behaviors;
(2) Storage, utilization and management of physical assets; compliance of accounting treatments; consistency of accounts with physical existence.  Investigations shall be carried out for imposing sanctions and penalties against acts of fraud such as unauthorized transfer, inter-change and sale of imported equipment and other physical articles;
(3) Truthfulness and compliance of current accounts, debtors and creditors;  timeliness of accounting treatments of debts and credits; existence of transfers and appropriations of funds with the use of relevant accounts.  For audit of projects with foreign loans, priorities should be place on accuracy and timeliness of debt implementation, accruals of interests payable and undertaking charges;  
(4) Compliance of expending reserves to repay loans, security arrangements and effective value preservation and appreciation of the residual amounts after repayment of principals with interests.  Investigations shall be carried out for imposing sanctions and penalties against acts of encroachment on and appropriation and seizure of funds or using funds for illegal operations;
(5) Truthfulness and compliance of foreign exchange transacts. Priorities of audit shall be placed on whether accounting records are made for translation of foreign currencies into RMB at the state exchange rates both at the time of transaction and at the end of the accounting year and on the compliance and accuracy of accounting treatments concerning foreign currency exchanges as well as profits and losses arising from such exchange transacts.  Investigations shall be carried out for imposing sanctions and penalties against acts in violation of laws and regulations such as appropriation, transfer, hedging and evasion of foreign exchanges and unauthorized dealings in foreign exchanges.  

Article 12     When auditing designated accounts of working capital in the form of foreign currencies, audit institutions shall examine the following major items:
(1) Timeliness and accuracy in posting funds for opening the accounts, and supplementary funds paid over by providers of foreign funds as well as interest incomes and other incomes;
(2) Compliance of various expenses.  Audit priorities shall be placed on whether the expenses are used for the purposes designated by project agreements, whether procedures of review and approval and testimonial documents of expenditure are complete and in compliance with relevant regulations, whether funds for reimbursement to be allocated to project units at lower levels are made in time and full and whether funds in transit at the year end truly exist;
(3) Compliance of the management of such accounts.

Article 13     When auditing the management of projects with foreign loans and assistance and effectiveness of fund utilization, audit  institutions shall examine the following major items:
(1) Completeness and effectiveness of project management systems, especially of systems of internal control and foreign debt management and mechanism for the prevention of foreign exchange risks;
(2) Accomplishment of project construction targets or planned targets and  indices;
(3) Implementation of cost indices and quotas determined by project estimates (budgets);
(4) Economic, social and environmental effects of project utilization or operation after the completion of the projects and the ability of repaying foreign debts.

Article 14    Where projects with foreign loans and assistance are included in the central budget as revenues and expenditures for foreign debts or are supplemented with funds from the central public finance, audit institutions shall, in addition to audit conducted in accordance with these Practice Directions, also implement the Provisional Practice Directions for Auditing Central Budgetary Implementation as well as the methodologies for auditing special funds of public finance formulated by the CNAO.

Article 15    For capital construction projects and technological renovation projects with state investment as their major sources of financing which are also within the definition of projects with foreign loans and assistance, audit institutions shall,  in addition to audit conducted according to these Practice Directions, also implement the Practice Directions of Audit Institutions for Auditing Budgetary (Estimate) Implementation of State Construction Projects and the Practice Directions of Audit Institutions for Auditing Final Accounts at the Completion of State Construction Projects.

Article 16    While auditing revenues and expenditures of organizations in charge of implementing projects with foreign loans and assistance, audit institutions shall implement audit regulations formulated by the CNAO.  Audit priorities shall be placed upon revenues and expenditures of supplementary funds for such projects, fund utilization, assets, liabilities, profits and losses related to economic performance and debt repayment ability of the projects as well as analysis and evaluation of the financial and debt repayment indicators.

Article 17    Audit institutions are entitled to require the audited bodies to provide the following information:
(1) Annual financial reports, relevant vouchers, books of account and other testimonial documents concerning projects with foreign loans and assistance;
(2) Annual financial reports and relevant vouchers, books of account and other testimonial documents of the audited bodies in charge of project implementation;
(3) Annual operating plans, annual expenditure plans and progress reports of the projects;
(4) Project agreements, documents of approval by competent government departments concerning project proposals and feasibility reports for application of foreign loans and assistance prepared by the audited bodies in charge of project implementation, project feasibility reports, evaluation reports produced by providers of foreign funds, manuals for payment of loans and assistance formulated by providers of foreign funds, minutes and memorandum of meetings attended by both the Chinese and foreign parties which are related to accounting and auditing of the concerned projects;
(5) Project management systems and accounting systems formulated by the audited bodies in charge of project implementation together with competent superior government departments as well as accounting systems of the industry in which the projects operate;
(6) Other relevant documents and materials.

Article 18    Audit institutions shall produce audit reports for projects with foreign loans and assistance according to the Standard of Audit Institution on Preparation and Review of Audit Reports  formulated by the CNAO.  Audit institutions authorized by the CNAO to produce audit reports for the foreign parties shall also prepare such reports for the foreign parties, which shall be carried out in accordance with the requirements of  project agreements and international audit standards.  For specific requirements of the preparation, audit institutions shall refer to the Manual for Auditing  Loan Projects Sponsored by International Banking Institutions.

In order to improve the quality of audit reports prepared for the foreign parties and maintain the overseas reputation of China's audit institutions, audit institutions producing such reports shall establish their responsibility system for quality assurance and strictly implement procedures of quality review.

Article 19    Local audit institutions at various levels shall prepare, no later than October 31 each year, integrated audit reports based on audit findings of projects with foreign loans and assistance and submit such reports to audit institutions at higher levels.   Such integrated audit reports should truthfully communicate basic information about audit of projects with foreign loans and assistance that are conducted by audit institutions producing the reports and audit institutions at lower levels, make comprehensive evaluation of the truthfulness, compliance and value for money of the revenues and expenditures of the above-mentioned projects, disclose areas in violation of rules and regulations and existing problems of business management, explain why audit recommendations and decisions are made and put forward recommendations for the improvement of macroscopic management of foreign fund application.

Article 20    Audit institutions shall make audit decisions for imposing sanctions and penalties in accordance with relevant laws and regulations against discovered acts of revenues and expenditures in violation of state stipulations.

Where necessary, audit institutions may conduct follow-up audit of the implementation of audit decisions and adoption of audit recommendations by the audited bodies in charge of project implementation.

Article 21     Where necessary, audit institutions may organize special audit, inter-sector audit or special audit investigations of tendentious issues effecting the overall situation of foreign fund application by the state, common problems emerging in the course of implementing economic regulations, policies on foreign fund application, industry policies and plans for development of the society and national economy as well as other particular issues related to the management of projects with foreign loans and assistance by competent government departments or connected with the management of state public finance and macroscopic economic management.  Special audit reports shall be prepared on the above audits.  Where material problems are found, audit institutions shall submit timely reports to governments at various levels and their relevant departments and put forward audit recommendations focusing upon improvement of the quality of foreign fund application.
  
Article 22    The authority to interpret these Practice Directions rests with the CNAO.

Article 23    These Practice Directions shall come into effect as of January 1, 1997.